Current Yield

The current yield is the annual coupon payment divided by the bond’s current market price. It measures the income return only, ignoring any price appreciation or depreciation that would occur from purchase to maturity. Current yield is the simplest yield metric but incomplete — it ignores the bondholder’s total return.

How current yield works

A bond with a $50 annual coupon trading at $900 has a current yield of $50 ÷ $900 = 5.56%. An investor buying at $900 receives $50 annually, earning a 5.56% yield on the cash invested.

If the same bond’s price rose to $1,050, the current yield would fall to $50 ÷ $1,050 = 4.76%. The coupon is unchanged (still $50), but the yield is lower because the investor paid more.

This inverse relationship (price up, current yield down) is fundamental to bonds.

Current yield vs. yield to maturity

Current yield is incomplete because it ignores price changes from purchase to maturity.

Example 1: Discount bond

• Bond with 4% coupon, trading at $900, maturing in 5 years
• Current yield = $40 ÷ $900 = 4.44%
• But the bondholder will receive $1,000 at maturity, a $100 capital gain
• Yield to maturity is approximately 5.9%, much higher than current yield

Example 2: Premium bond

• Bond with 4% coupon, trading at $1,100, maturing in 5 years
• Current yield = $40 ÷ $1,100 = 3.64%
• But the bondholder will receive $1,000 at maturity, a $100 capital loss
• Yield to maturity is approximately 2.5%, much lower than current yield

Current yield tells you only the income, not the total return.

When current yield is useful

Current yield is useful primarily for:

1. Income-focused investors — Those caring primarily about cash flow (retirees, endowments). If your goal is maximizing annual income, current yield is the relevant metric.

2. Very-short-term holding — If you plan to sell the bond next month, current yield (for that one month) matters more than YTM (over years).

3. Rough approximation — For bonds with maturity dates far in the future, current yield and YTM are closer to each other, making current yield a rougher but simpler estimate.

Why yield to maturity is superior

Yield to maturity is superior because it accounts for the complete cash flow: all coupons plus the principal repayment. It is the “true” return you earn if you hold the bond to maturity.

For bond pricing and comparison, professional investors use yield to maturity, not current yield. Bond markets quote prices in terms of yield to maturity, not current yield.

Relationship to coupon rate

For a bond trading at par ($1,000), current yield equals the coupon rate:

• 4% coupon = $40 annual payment
• $40 ÷ $1,000 = 4% current yield

For a bond trading at a premium (above par), current yield is below the coupon rate.

For a bond trading at a discount (below par), current yield is above the coupon rate.

Yield to worst and conservative returns

Conservative investors might use current yield as a floor estimate. If a bond’s current yield is 4%, you are guaranteed to earn at least 4% annually in coupon income, even if the bond’s price falls.

The additional return from yield to maturity (if the bond was purchased at a discount) might not materialize if the bond is sold before maturity and prices have fallen further.

See also